Rules When Appointing or Removing a Company Director

Many business founders go into business with a partner (or partners) and set up a private company where each founder is a director and a shareholder. However, it is not uncommon for co-founders’ ideas and interests to diverge at some point. This can also occur in public companies which have many members and a large board of directors. This article unpacks the common issues and procedures surrounding how your company can appoint or remove a company director from office.

Key Steps

You need to take several steps to appoint or remove a director of your company.

These can be broken down into three categories, including:

• asking for board and shareholder approval from the company;
• gaining consent from the individual; and
• notifying the Australian Securities Information Commission (ASIC). 

It is important for you to comply with these steps. Indeed, if you do not follow these processes, you may risk the chance of the appointment or removal of directors not being fully effective. Additionally, there could be a risk of fines due to non-compliance. Furthermore, directors of a company carry considerable control and responsibility. Therefore, it is important that the company meets these requirements. Additionally, it is crucial your company maintains good record-keeping practices so that all major changes are documented adequately. 

Governing Rules

Your company will need to comply with its own decision-making requirements, which are usually contained in the shareholders’ agreement or your company constitution. These documents may include provisions concerning how to remove a company director from office. If you do not have either of these documents, then the replaceable rules in the Corporations Act will apply. 

Appointing a Director

When appointing a new director, the replaceable rules allow: 

• shareholders to appoint a director by passing an ordinary resolution (50% majority vote) at a general meeting; or 
• the board of directors to appoint a director by the same 50% ordinary resolution. 

The company’s shareholders’ agreement or constitution may provide additional ways in which you can appoint directors. It is common to have additional rights for founders or certain shareholders to appoint a director on their behalf.

Removing a Director

There is also a replaceable rule that allows the shareholders to: 

• remove a director by passing an ordinary resolution at a general meeting; and 
• appoint a replacement director at the same time. 

A director of a company can also resign by providing the company with written notice. 

While a director is very important to the operation of the company, they cannot be locked into that position without the ability to leave the company. Therefore, it is important to have a couple of knowledgeable directors so that you leave the company in capable hands if a director chooses to resign. From a decision-making perspective, it is also best to have an uneven number of directors, as this will avoid a deadlock on votes. 

Are There Other Ways to Remove a Director of a Public Company?

In addition to having a director resign from the company with written notice or removing a director by passing an ordinary resolution per the replaceable rules, the company constitution can provide other valid mechanisms to remove a director. However, it is important to note that these mechanisms will only be valid if they do not conflict with the rules set out above in the Corporations Act. 

Public vs Private Company

The specific rules that you need to follow will depend on whether you are a private or public company. Private companies have the most flexibility when it comes to appointing or removing a director.

As a private company, the replaceable rules enable you to remove a director by a resolution of the company. However, if your company constitution has modified or replaced this rule, then you may be able to remove a director by other means. 

On the other hand, a public company can only remove a director from office by passing an ordinary resolution of shareholders. Unlike a private company, a public company can do so regardless of the company’s constitution or any agreement between the company, the director and its members. However, directors of a public company cannot remove a fellow director, only the shareholders can.

Meetings and Resolutions

You can appoint and/or remove directors through a general meeting, whether in accordance with the replaceable rules or your company’s shareholders agreement.

To pass a resolution to remove a director from office, you must give a notice of intention to pass this resolution to the company. You must do this at least two months before you schedule the meeting to be held. After the company receives the notice, the company must then give the director a copy of the notice as soon as possible.

In response, this director has a right to put their case to the shareholders by providing a written statement and speaking at the meeting. The company must circulate this written statement to the shareholders.

How to Pass a Resolution

Once you have issued this notice of intention, you must pass the resolution at a company meeting. The meeting must satisfy your company’s requirements, which will likely require:

• properly convening the meeting with enough notice for shareholders, typically 21 days; and
• satisfying the meeting attendance quorum.

You must pass the resolution by an ordinary majority, which requires that more than 50% of the shareholders of the company support the proposition to appoint or remove the director.

Therefore, a shareholder or shareholders who hold 51% or more of voting power can pass the resolution to remove another director, even if that other director does not want the board to remove them. In situations where there is a 50%/50% shareholders split, you should follow the dispute resolution procedure set out in the agreement to resolve the argument.

This vote must be logged in the company’s minute book and signed by the chairman of the meeting. It is also not essential for the shareholders to hold a physical or virtual meeting. They can also pass a circulating resolution, which is a document circulated and signed by all shareholders entitled to vote, stating that they agree to pass the appointment or removal of a director.

Consent and Resignation

Once your company approves the decision to appoint a specific director, that director must formally provide their consent to act as director in the form of a signed letter. This letter is a “consent to act”.

It is a simple document that is: 

• signed by the director; and 
• states that the individual provides their consent to act as director. 

Moreover, this consent to act should also state that they have not been disqualified to act as a director. If the director is resigning on their own accord, they will need to provide a signed letter of registration to the company. If the shareholders or directors have the power to remove a director, you can remove them by: 

• the applicable vote at a general meeting; or 
• signing a circulating resolution as discussed above. 

Updating ASIC

As part of the process of appointing or removing a director, you should update ASIC as to this change. 

If a director is resigning, they: 

• can inform ASIC themselves; and
• will need to provide a copy of the signed resignation letter. 

If this does not occur, your company will need to update ASIC within 28 days to avoid a late fee. You can do this through your ASIC Connect account, using your corporate key. You will need to insert:

• your company details; and
• the day the director was appointed or resigned.

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Key Takeaways

Before taking any action to remove a director from office, you should consult your company’s governing documents, such as: 

• your constitution, 
• the shareholder agreement; and 
• the rules under the Corporations Act. 

It is important that your directors and shareholders understand how these processes work. Importantly, the rules and requirements differ depending on whether the company is public or private. You need to make sure your company has properly documented this removal or appointment by passing the appropriate resolution. The director that you appoint must provide signed consent to act. If they are resigning on their own, they will need to provide a signed resignation. Finally, your company will need to update ASIC within 28 days.

If you need assistance appointing or removing a director, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page. 

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